As you approach retirement age, your focus on savings naturally begins to change. You stop viewing that nest egg as a place to store money, and start seeing it as a place to pull money from.
For those heavily invested in RRSPs, RRIFs are one of the most popular vehicles to make that transition from saving to spending.
Not only is the transition from RRSP to RRIF nearly seamless, but the RRIF is also a very flexible tool used to optimize your savings and help to manage your spending.
What is a RRIF (Registered Retirement Income Fund)?
It’s easiest to think of a RRIF like an RRSP in reverse.
Instead of accumulating savings in a tax-deferred account, as you do in an RRSP, a RRIF is an investment vehicle designed to help you gradually withdraw your money in retirement so you don’t get hit by all those deferred taxes at once.
So, if an RRSP is a jar that you save water in, the RRIF is a water bottle – designed to allow small, continuous sips so you don’t end up wasting your water with messy (tax) spills.
Key features of RRIFs
- Your RRIF is subject to legislated, minimum withdrawals
- The transfer from RRSP to RRIF is not taxed, but withdrawals from the RRIF are taxed
- RRIF withdrawals are subject to taxes at the time of withdrawal
- Your financial institution will withhold a percentage for amounts above the legislated minimum amount
- You do not pay taxes when you convert your account from an RRSP to a RRIF, including any growth from the investments in the RRIF
- You can choose how often you want to withdraw money: bi-weekly, monthly, quarterly, semi-annually or annually
Converting your RRSP to an RRIF
Like the similar names suggest, these two investment vehicles were designed to work together, making the transition from working and saving to retiring and spending simple and straightforward.
While the transition process is simple, we recommend you start making it early to avoid missing the age deadline for converting your RRSP (which we’ll cover in the next section).
The process of converting your RRSP to a RRIF
When you’re close to the deadline to transition your RRSP to a RRIF (which is the end of the calendar year in which you turn 71 years old) your financial institution should contact you. They’ll have you fill out a RRIF application, choose a beneficiary, and decide how much and how frequently you want your RRIF payments to be.
At what age do I need to convert my RRSP to a RRIF?
You need to convert your RRSP into a RRIF, by the end of the calendar year that you turn 71.
What you do with your RRSP is up to you. You can pull funds out as a lump sum and take the tax hit, or transfer it to a retirement income product like an RRIF, where you won’t need to pay all the taxes at once.
If you choose to pull RRSP funds out all at once, you may end up paying a higher tax rate, based on your total taxable income for that year.
Changing your RRSP to a RRIF protects you from that tax bump by allowing you to spread withdrawals out across your retirement and keep your retirement income, and tax bracket, lower.
How much do I need to withdraw from my RRIF each year?
There is a percentage payout schedule set by the government that dictates RRIF minimum withdrawals. Each minimum is calculated as a percentage of the full value of your investments in the RRIF at the end of the calendar year. This percentage increases each year along with your age.
In 2023, these requirements start at 5% of the value in your RRIF at age 71, and climb to 20% by age 95 (and up). If you have a younger spouse, you can base your withdrawal’s on their age, allowing you to withdraw less if you don’t have need of the income or just want to lower your income tax bill.
To calculate your minimums, head over to the government’s RRIF minimum calculator.
When do I need to make my first withdrawal?
In your first year of owning a RRIF (i.e. the year you turn age 71), you don’t need to make a withdrawal.
However, your first withdrawal from your RRIF must be made by the end of the calendar year in which you turn 72.
For example, if your 71st birthday is on July 8th of 2030, you have until December 31 of 2031 (the year in which you turn 72) to start pulling money out.
What investments can I keep in my RRIF?
RRIFs are designed to work seamlessly with your RRSP which means you use the same investments and stay in control of your savings, instead of handing them over to a third party.
Qualifying investment options can include:
- Mutual funds that invest in eligible securities
- Corporate and government bonds
- Canada Savings Bonds
- Treasury bills
- Term deposits
- Exchange Traded Funds (ETFs)
- Shares of Canadian corporations